Choosing An Internet Merchant
Account
Surf to Google and perform a search on
"Internet Merchant Account". The results are staggering. If you have created a web based business and need to accept
credit card payments, your choices are limitless. Before you partner
with a provider, take time to understand the different components of
internet credit card processing, and know what to look for in a merchant
provider.
How It Works
Accepting credit card payments through
your web site actually requires multiple components. Between a paying
customer and your bank account, three layers exist:
Payment Gateway - This is the code that
will transmit a customer's order to and from an internet merchant
account provider. The payment gateway provides you the ability to accept
customer billing information (credit card number, credit card type,
expiration date, and payment amount) and the necessary validation steps
that must be followed before the credit card is actually billed.
Internet Merchant Account - A Merchant
Account is an account with a financial institution or bank, which
enables you to accept credit card payments from your clients. The
payment gateway actually transmits the billing information to the
internet merchant account provider. Unfortunately, most local banks do
not provide internet merchant account capability.
The main reason why most local
financial institutions or banks do not want to provide online merchant
accounts is because transactions conducted over the Internet are totally
different from face to face transactions where a signature is required
to authorize the purchase. This makes online transactions prone to
credit card fraud. Fraud protection should be one of your primary
considerations when choosing an internet merchant account provider.
Web Site - Regardless of which merchant
provider and gateway service you choose, your web site will need to
integrate with your service providers. Most providers include detailed
web integration instructions.
How Much Does It Cost
Understanding the total costs of your
merchant provider can be tricky. Remember my Google example - there are
more merchant account providers than there are people looking for
internet merchant accounts so ask questions and be picky! Typically, an
internet merchant account will have three types of costs:
- Up Front Application Fees
- On Going Fixed Fee
- Discount Rate
- Fixed Transaction Fee
- Termination Fees
- Miscellaneous Fees
Let us discuss each type of cost:
Up Front Application Fees
Many internet merchant accounts will
require an up front application fee. This fee, supposedly, is to cover
their costs for processing your application. In case you choose not to
open an internet merchant account, they still cover their initial costs.
Although common, many providers waive these fees and I recommend that
you choose a provider that does not require an up front fee.
On Going Fixed Fee
Most all internet merchant providers
require a monthly fixed fee or "statement fee" as it is commonly named,
which is simply another way to cover their costs and make money. You
will be hard pressed to find a provider that does not require this type
of fee on a monthly basis. However, do not choose an internet merchant
account that requires more than $10 per month. Additionally, most
internet merchant providers require a monthly minimum (usually $25). The
bottom line is that you will be paying at least $25 per month (on top of
the monthly statement fee) for your account.
Discount Rate
Usually, the discount rate will be
between 2 and 4 percent. The discount rate is the sales commission the
provider earns on each sale. For example, if the discount rate offered
is 3%, and you receive a sale over your web site for $20, you will owe
60 cents to your internet merchant provider.
Fixed Transaction Fee
Usually between $0.20 and $0.30, the
fixed transaction fee is the fixed fee portion of each sale. Unlike the
discount rate, the fixed transaction fee is the same for every
transaction. Whether you get a $1 sale or a $100 sale, the transaction
fee will be the same.
Termination Fee
A bit more hidden in the small print, a
termination fee can apply if you cancel your merchant account within a
specified period of time (usually within one year). But beware, some
merchant providers require a three year commitment!
Miscellaneous Fees
If a customer requests a refund and
they want their credit card credited, an internet merchant provider will
charge you a separate fee (usually between $10 - $20). Read the contract
carefully, as other special fees may apply.
Putting It All Together
Now that the different fees have been
explained, let us look at an example set of transactions to help
understand what an internet merchant account may cost your business on a
monthly basis.
I have created a simple formula to help
you calculate your monthly charges:
Total Charges = Statement Fee + Number
of Transactions x (Average Sale x Discount Rate + Fixed Transaction Fee)
+ (Number of Chargebacks x Chargeback Fee)
For example, let us see you sell
widgets over the internet. The sales price for each widget is $10. You
typically have 100 sales per month and about 5 people request refunds (chargebacks).
For this example, let us assume you have signed up with Jones&Jones
internet merchant account services and have the following terms:
Discount Rate - %2.5
Statement Fee - $10
Fixed Transaction Fee - $0.30
Chargeback Fee - $15
Using my formula above, your monthly
Jones&Jones charges will be:
Total Charges = 10 + 100 x (10 x .025 +
0.3) + (5 x 15) = $140
You can calculate your monthly sales
revenue by multiplying your sales volume by your price:
Monthly Sales Revenue = 100 x $10 =
$1000
Your internet merchant provider is
costing you %14 or your total sales.
Making Your Decision
Before you choose and internet merchant
provider, understand all of the cost components. Use your current or
projected sales data to forecast what your internet merchant account
costs will be. Planning ahead can save you time and money.
